The Commission had initially attacked Belgian excess profit rulings as an aid scheme, but its prior decision of 11 January 2016 was annulled by the EU General Court in February 2019. In addition to appealing against the judgment, the Commission decided to open in September 2019 formal investigations into the individual cases of 39 beneficiaries, which are all Belgian companies forming part of multinational groups.
What are excess profit rulings?
The cases concern unilateral transfer pricing adjustments leading to the non-taxation of a portion of profits. Most of the Belgian companies were considered “central entrepreneurs”. The transfer pricing analyses generally consisted of a two-step approach. In a first step, a TNMM analysis was performed to determine the remuneration allocable to other group companies performing routine functions. The residual profit was then allocated to the Belgian central entrepreneur. Belgium, however, considers that some of this residual profit should not be taxed in the hands of the central entrepreneur, as it arose from group synergies and not from the functions of the Belgian company. Thus, a second TNMM analysis was performed, this time with the central entrepreneur as tested party whose remuneration is determined. The difference between the profits under the first and the second TNMM analysis was qualified as ‘excess profit’ giving rise to a downward transfer pricing adjustment in Belgium, regardless of whether other group entities were subject to a corresponding upward adjustment.
Why does the Commission attack these rulings under State aid rules?
- The Commission questions the compatibility of these rulings with State aid rules and with the arm’s length principle on the following grounds:
- Belgian law only allowed downward transfer pricing adjustments in reaction to a primary upward adjustment abroad. Hence, Belgium should have identified the ‘counterparty’ under the second TNMM analysis and verified whether it was taxed on the amount of the ‘excess profit’.
- Applying twice the TNMM is incorrect. If the central entrepreneur is correctly chosen as most complex party under the first analysis, it is necessarily entitled to the residual profit.
- International (OECD) guidance does not support making transfer pricing adjustments because of synergies. The Commission refers to the (postdating) 2017 OECD Transfer Pricing Guidelines to outline how synergies may be considered and notes that earlier guidance stressed the difficulty to attribute profit arising from synergies and economies of scale. If anything, it seems these synergies are created thanks to the establishment of the Belgian central entrepreneur.
- The beneficial tax treatment was subject to obtaining a ruling and to the central entrepreneur being part of a multinational (but not a domestic) group.
What are the next steps?
The progress of the formal investigation is not public. The publication of the opening decision is the sole formal opportunity for interested third parties to submit comments. Once the investigation is completed, the Commission will issue a final decision. The Belgian government recovered the amount of the alleged aid following the Commission’s decision of January 2016.
Any question?
We will keep you informed of further developments. Should you have any question, please contact our EU State aid team or your trusted Loyens & Loeff contact.